Is crowdfunding a poor substitute for life insurance?

Crowdfunding has become a popular means of obtaining financial assistance in times of crisis, raising money for everything from natural disaster relief efforts to rebuilding burned down neighborhoods. But the digital fundraising avenue is also being turned to when a loved one has passed without a life insurance policy to finance burial costs or household expenses for surviving relatives. And that should raise concern.

Sure, when someone is struggling it can be heartening to see family, friends, and even strangers pitch in via crowdfunding platforms -- essentially websites that let people raise money online through Facebook, Twitter, and email. A third party helps set up the campaign and manages the donations.

But there’s a downside to consider: such financial contributions may not be enough and are not guaranteed.

Nevertheless, many people seem to be turning to that mechanism. For example, one of the most popular categories on GoFundMe, one of the more well-known crowdfunding websites, is memorials . There, you’ll find thousands of requests for financial assistance with funeral expenses, memorial funds and burial costs. You’ll also find requests for help with household expenses due to the loss of the deceased’s income. Anyone can use the site to ask friends, family, and strangers to donate to their cause.

Of course, we’re going to tell you that there’s a better option: life insurance. But beyond our obvious self-interest, the crowdfunding phenomenon points out some serious considerations for everyone about life and financial planning.

Experiencing the tragic loss of a loved one is bad enough. Not having the money to give them a proper send-off—let alone to care for the survivors who depended on that person’s income or other contributions to the household—only adds to the grief. Having to publicly beg for that money compounds the emotional stress of the situation, along with the additional worries that what money does come in might not be enough.

Reasons people go without life insurance

Why didn’t the people asking for money via crowdfunding sites have life insurance in the first place?

In some cases, it’s because the deceased was a child. Some tragic examples from GoFundMe’s memorial section: A high-school-aged brother and sister died in a car accident. A second-grade girl got struck by a car while out riding her bike. A 13-year-old suddenly collapsed during recess and died.

Some financial pundits say that you don’t need to buy life insurance for your children because they’re not likely to die and because, in most cases, no one depends on their income.1,2 And it’s understandable that families don’t always have the money to cover the unexpected expense of losing someone who dies so early in life. (That’s why some financial professionals do advise buying life insurance for your kids .)

In other cases, crowdfunding campaigns are for young parents who probably expected to live a long time and didn’t think they needed life insurance yet. Or perhaps they knew they needed it to protect their families, but hadn’t gotten around to purchasing it.

Other reasons why people don’t buy life insurance are that they assume they won’t qualify for coverage or they think they won’t be able to afford the premiums, so they never look into it.3

“Many have put off buying life insurance based on the belief that it costs too much,” states a 2018 report from LIMRA, a worldwide association of insurance and financial services companies, and Life Happens, the insurance advocate and nonprofit organization. 3 “Consumers were asked how much a $250,000 term life policy would cost for a healthy 30-year-old. The average cost for such coverage is around $160 per year. Most consumers estimate the cost of coverage at over three times its actual cost.” ( Related: Get a life insurance quote )

A GoFundMe campaign might help you raise several thousand dollars, even tens of thousands. But you could get several hundred thousand dollars, or even a million dollars or more, from a life insurance policy.

People also avoid shopping for life insurance because they don’t want to think about death, don’t trust insurance companies or agents, or get confused when they try to research life insurance.3

Why you need life insurance

If you have a child, spouse, or dependent parent who would have trouble meeting financial obligations without your income—or without your ability to care for them—you need life insurance. Even if no one depends on you, if your family wouldn’t have the financial resources to handle your final expenses, a small life insurance policy that you take out now could alleviate a lot of their stress if you die prematurely.

Insurance is supposed to protect against foreseeable risks so you don't have to turn to crowdfunding. While none of us knows how or when we will die, we know that it will happen. Death is a foreseeable risk.

You need to insure against its financial impact on your loved ones, just like when you buy insurance to deal with other foreseeable risks: getting seriously ill, getting in a car accident, or experiencing a house fire.

There are two types of life insurance: term and permanent. If cost is a concern, look at term insurance , which provides a death benefit for a certain number of years: 5-, 10-, 20-, and 30-year terms are common. Permanent life insurance stays with you for life as long as you pay the premiums, but it costs more since there’s a higher likelihood that your beneficiaries will one day file a claim.

In addition, there’s simplified whole life insurance , which doesn’t require a medical exam. Depending on the insurer, benefits are limited to a small sum, typically $2,000 to $25,000, and are intended to help cover final expenses. ( Get a quote)

A similar kind of insurance is guaranteed acceptance life insurance, which also doesn’t require a medical exam and provides benefits intended for final expenses. This kind of insurance may be more expensive and there may be there may be a waiting period during which benefits aren’t payable if you die. This provision helps to protect insurance companies from the risk that only the people most likely to file claims will purchase insurance.

Even if you do have a life insurance policy, you might be underinsured. In fact, one in five people who do have life insurance think they don’t have enough,3 according to the 2018 LIMRA/Life Happens study.

Consult a financial professional to get help evaluating your life insurance needs and purchasing a policy you can afford.

Don’t put your family in the position of having to beg for money online if you die unexpectedly.

One of our financial advisors can contact you to discuss taking care of loved ones, a family business, or a group of employees.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.

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